2014 BCG Local Dynamos. How Companies in Emerging Markets Are Winning at Home

Transcription

1 2014 BCG Local Dynamos How Companies in Emerging Markets Are Winning at Home

2 The Boston Consulting Group (BCG) is a global management consulting firm and the world s leading advisor on business strategy. We partner with clients from the private, public, and not-forprofit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep in sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit bcg.com.

3 2014 BCG Local Dynamos How Companies in Emerging Markets Are Winning at Home Vincent Chin David C. Michael July 2014 The Boston Consulting Group

4 Contents 3 Building Local Empires 5 Emerging Markets: Still Kicking 7 Meet the Local Dynamos 13 The Secrets of Their Success Catering to Customers and Local Conditions Leveraging Digital Technologies Operating at Warp Speed Adapting to Uncertainty and Circumstance Building Talent Engines Establishing Functional Excellence 24 Shaping Your Response to the Local Dynamos 26 For Further Reading 27 Note to the Reader 2 How Companies in Emerging Markets Are Winning at Home

5 Building Local Empires Emerging markets remain global growth engines. Although some are doing better than others, emerging markets offer the most promising opportunities for expansion. Yet many global companies struggle to create successful business models in these markets. At the same time, many local companies are thriving in emerging markets building businesses that attract local customers and defeat both other homegrown companies and multinationals. Understanding the successful practices of these companies can help you win in these markets. In the banking industry, for example, several companies have grown quickly and profitably in emerging markets, even though most consumers frequently have unstable incomes and do not have even a checking account. In Mexico, Banco Mercantil del Norte, or Banorte, wanted to reach these potential customers without investing in expensive bank branches. Banorte decided to rely on others bricks and mortar, partnering with Telecomm- Telegrafos, a rural telecom operator with 1,621 retail locations; 7-Eleven, one of the fastest-growing convenience chains in Mexico, with 1,720 contact points; Tiendas Extra, a convenience store with 883 locations; Soriana, a supermarket chain offering 633 points of sale; and Grupo Control, with 75 points of contact as of March These partnerships aim to offer basic financial products such as deposits, credit cards, remittances, and withdrawals. Banorte now serves about one in six Mexican consumers and has become Mexico s third largest bank, measured by deposits and loans. Across the Pacific Ocean, Bank Rakyat Indonesia (BRI), the nation s oldest and most profitable bank, wants to serve the street vendors and merchants that power the nation s local economy. BRI sends employees equipped with handheld devices into 2,300 busy markets and bazaars, which serve nearly 6 million customers. The bank is experimenting with floating branches to reach remote customers on Indonesia s more than 900 inhabited islands. Guaranty Trust Bank, the largest and most profitable bank in Nigeria, has increased its retail presence through mobile and Internet communications. The bank s mobile money application facilitates money transfers, payments for goods and services, purchases of mobile airtime, and ATM cash withdrawals that don t require a card. These three moves illustrate the ways that local companies convert the constraints of emerging economies into profitable opportunities. In all industries not just banking homegrown companies are finding The Boston Consulting Group 3

6 analogous ways to win. They have moved beyond creating advantages built on cheap labor to become thriving commercial enterprises. To spotlight these companies, we have compiled a list of 50 local dynamos, energetic private-sector companies that focus on their home markets. The list is representative, not exhaustive. While we want to recognize these companies for their formidable accomplishments, we also want to gain insights from their successes and see how their practices can be applied more broadly to all companies that want to do better in these markets. We created the first list of local dynamos in (See The BCG 50 Local Dynamos: How Dynamic RDE-Based Companies Are Mastering Their Home Markets and What MNCs Need to Learn from Them, BCG report, March 2008.) The list with the accompanying lessons derived from it was published in Harvard Business Review, bringing wide and welldeserved attention to these success stories. Not surprisingly, these companies have continued to outperform. The world has changed dramatically during the past six years. The global financial crisis helped expose the sharply divergent growth patterns of mature and emerging markets, while Africa s development has highlighted just how rapidly markets that were once considered hopeless can become promising and full of ambition. It is time to offer a new list and a new set of lessons. Notably, local dynamos are not global challengers, companies from emerging markets that are becoming worldwide leaders in their respective industries. Neither are they necessarily global challengers in waiting. They are simply thriving at home with a focus on local markets. Local dynamos are winning customers with targeted and customized business models, surpassing both local state-owned companies with built-in advantages and large multinationals with deep pockets eager to find new growth opportunities. Local dynamos are creating digital and mobile solutions to overcome the constraints and logistical challenges of their home markets. They are rapidly scaling up their operations to take advantage of the rising tide of local economies. And they are thriving amid uncertainty and turmoil, as well as complex regulatory environments, to create market positions that competitors will have difficulty duplicating. At the same time, they are creating world-class capabilities in areas such as talent management, innovation, and product development. Local and global competitors can ignore these dynamos at their peril or they can learn from their successes. 4 How Companies in Emerging Markets Are Winning at Home

7 Emerging Markets Still Kicking Easy growth may be coming to a close in many emerging markets, but the longterm trends remain bullish. Collectively, emerging markets will remain the biggest sources of growth for decades, even if they are growing at different speeds, experiencing different degrees of financial health, and facing different structural challenges. 1 (See Exhibit 1.) Population Growth. Emerging economies are growing four times faster than mature Exhibit 1 The Four Pillars of Rising Prosperity Population Growth Emerging markets are growing four times faster than mature markets By 2020, 6.4 billion people will live in emerging markets South Asia and Africa will contribute the most growth Consumption Growth By 2020, emerging markets will add 730 million middleand affluent-class consumers These consumers will account for 35 percent of spending, compared with 25 percent today Nearly half of the emerging-market population will be middle class or affluent Urbanization By 2020, emerging markets will add 600 million urban dwellers About 40 percent of the world s population will live in these cities Emerging-market cities will grow ten times faster than mature-market cities Trade Liberalization More than 350 free-trade agreements are in place today The free-trade movement has been especially strong in the past decade The Trans-Pacific Partnership and Regional Comprehensive Economic Partnership talks are ongoing Sources: International Monetary Fund; BCG analysis. The Boston Consulting Group 5

8 markets. By 2020, 6.4 billion people, out of a global population of 7.5 billion, will be living in these markets. The population pyramids of most emerging markets are bottom heavy, with younger people entering the workforce faster than older people are retiring. Consumption Growth. The populations of these markets are not just growing in size; they are also becoming wealthier. From 2010 to 2020, more than two-thirds of the anticipated growth in consumer spending, or $11 trillion, will originate in emerging markets. In just four countries Brazil, China, India, and Indonesia 730 million people will join the ranks of the middle and affluent classes. Urbanization. By 2020, the populations of cities in emerging economies will increase by 600 million people. More than 700 cities in China alone will have at least 250,000 people in the middle and affluent classes. Urbanization brings multiple economic benefits, including greater consumer spending especially on education and health care and higher spending on infrastructure. Trade Liberalization. Trade barriers are falling as countries increasingly recognize the value of opening their markets to foreign competition and goods. Free trade leads to higher economic activity and greater foreign investment, productivity, and R&D spending. Free trade also promotes structural economic reform with regard to product quality, the rule of law, and customs efficiency. Yet despite the slowdown in easy growth, multinationals still have their eyes on emerging markets. In a recent BCG survey of 156 executives, more than three-quarters, or 78 percent, said that they expect their companies to gain share in these markets. (See Playing to Win in Emerging Markets: Multinational Executive Survey Reveals Gap Between Ambition and Execution, BCG Focus, September 2013.) These executives also recognize that local competitors are a bigger threat than other multinationals: nearly threequarters, or 73 percent, said that local companies are more effective competitors than other multinationals. All the more reason, therefore, to gain a deeper understanding of the local dynamos driving these economies. (See Exhibit 2.) Note 1. See From Emerging to Diverging Markets: Why It s Time to Reassess Your Emerging-Market Strategy, BCG article, October Exhibit 2 For Most Executives, Local Competitors Constitute the Largest Threat in Emerging Markets Percentage of respondents citing each type of competitor as a threat % Multinationals based in developed markets Multinationals based in emerging markets Locally based companies in a specific emerging market Source: BCG Globalization Readiness Survey. 6 How Companies in Emerging Markets Are Winning at Home

9 Meet the Local Dynamos The 2014 list of local dynamos reflects the consumer-driven focus of emerging markets as those markets increasingly resemble mature-market economies and as their sources of advantages move beyond low costs and low wages. Since BCG released the original list of local dynamos in 2008, the number of companies in health-related sectors has jumped from two to five; in financial services, from eight to ten; and in consumer goods, from nine to eleven. (See exhibits 3, 4, and 5. For information about how we chose the dynamos, see the sidebar Selecting the BCG 50 Local Dynamos. For a review of how the 2008 local dynamos have been doing, see the sidebar Surging Ahead. ) Many of the local dynamos are competing on innovation rather than cost and other traditional sources of advantage. For example, South Africa s Discovery Health, an insurance administrator, rewards its cus- Exhibit 3 A High Proportion of 2014 Local Dynamos Are in the Consumer Goods and Financial Services Industries Industry Number of companies Entertainment and media Source: BCG analysis. Travel Health care Internet and technology Retail Industrial goods and energy Financial services Consumer goods The Boston Consulting Group 7

10 Exhibit 4 Local Dynamos by the Numbers 31 Number of service companies 28 Annual percentage of revenue growth, Annual percentage of total shareholder return, Number of Latin American companies 6 Number of African companies 5 Number of health care companies Source: BCG analysis. 1 Revenue growth is calculated from the end of 2009 to the end of Shareholder return is calculated from January 1, 2009, to January 1, Selecting the BCG 50 Local Dynamos To identify the 2014 local dynamos, we started by dividing emerging markets into seven regions: Africa; China; India; Latin America; the Middle East and Turkey; Russia; and Southeast Asia. Unlike in 2008, we did not analyze companies in Eastern Europe because of the region s increasing integration with the European Union. Then, within each region, we adopted a two-step qualitative and quantitative approach. First, we conducted a broad search for successful private companies that had strong reputations and a domestic focus but did not have traditional sources of advantage, such as government ownership, large land ownership, or a monopoly license. markets and were among the leading private-sector companies in their industries. We were looking for companies that were broadly representative of the forces and domestic industries driving success in their home markets. Still, the 50 companies we selected are certainly not the only winners with domestic-oriented business models in these markets. There are many other compelling examples of companies that have succeeded in these promising, yet challenging, environments. Second, we narrowed the list so it included only companies that were true dynamos: those that were succeeding by adapting to the unique challenges of their home 8 How Companies in Emerging Markets Are Winning at Home

11 Exhibit 5 The 2014 BCG Local Dynamos Africa China India Latin America Middle East and Turkey Russia Southeast Asia Company Discovery Health Douja Promotion Groupe Addoha Equity Bank Guaranty Trust Bank Woolworths Zambeef Products China Minsheng Bank Dalian Wanda Group HaiDiLao Hotpot Home Inns & Hotels Management Jia Duo Bao Jiangsu Hengrui Medicine S.F. Express Tingyi Cayman Islands Holding Company Xiaomi Yonghui Superstores Amara Raja Bennett, Coleman & Company Flipkart IndiGo Jubilant FoodWorks Micromax Narayana Health Shriram Transport Finance Banco de Crédito e Inversiones Cielo Cinépolis Enalta Inovações Tecnológicas GranBio Banco Mercantil del Norte Magazine Luiza Ourofino Quala Abdi İbrahim Abdul Latif Jameel Air Arabia Almarai BIM LC Waikiki Bashneft Mail.Ru Ozon.ru Tinkoff Credit Systems Bank Bangkok Dusit Medical Services Bank Rakyat Indonesia Masan Group RHB Banking Group SapuraKencana Petroleum SM Wings Business Health insurance administrator Real estate developer and operator Commercial bank Commercial bank Department store Beef and agricultural goods producer Commercial bank Property developer Restaurant chain Hotel chain Herbal tea producer Pharmaceutical company Express delivery courier Food and beverage producer Smartphone and consumer electronics producer Supermarket chain Electronics manufacturer Media company Online retailer Airline Restaurant chain Consumer electronics producer Health care provider Commercial finance vendor Commercial bank Payment system Movie theater chain IT solutions provider Biotechnology company Commercial bank Retailer Veterinary products producer Food and beverage company Pharmaceuticals company Auto dealer Airline Dairy producers Retailer Apparel retailer Oil producer Internet company Online retailer Consumer finance provider Health care provider Commercial bank Food and beverage producer Commercial bank Oil and gas services provider Retailer Personal-care and household products producer Source: BCG analysis. The Boston Consulting Group 9

12 Surging Ahead The 2008 local dynamos have lived up to their potential. They are now thriving companies that have outpaced the competition in their home markets. From 2009 to 2013, these companies revenues grew at an average annual rate of 19 percent, exceeding the 11 percent rate of the MSCI Emerging Market Index and the 5 percent rate of the S&P 500. The five-year total shareholder return of the local dynamos also far outstrips other benchmarks. The 32 publicly traded local dynamos returned 25 percent from 2009 to 2013, compared with 18 percent for the S&P 500 index and 15 percent for the MSCI Emerging Market Index. Three of the companies expanded their geographic footprints and became global challengers: Goldwind Science and Technology, Bharti Airtel, and AirAsia Berhad. Two went public: Goodbaby, of China, and SKS Microfinance, of India. Three of the original local dynamos have been acquired since the 2008 list was released. tomers for modifying their lifestyles and habits. Another innovator is China s Xiaomi, a company that develops and sells smartphones online. Forgoing expensive retail outlets, Xiaomi relies heavily on its official website and social media to promote the sales of its phones and to receive consumer feedback. While there are still 19 manufacturers among the 50 local dynamos, many of the other companies on the list are building sophisticated logistics, inventory, and manufacturing operations. The 2014 local dynamos have been growing faster than comparable companies in emerging and mature economies. In Russia, for example, Bashneft has shaken up the largely state-owned oil-and-gas industry by reinvigorating exploration and production in legacy regions and launching new projects, boosting output by more than 37 percent over the past five years. It has also modernized and improved the efficiency of its refineries. India s Amara Raja has succeeded in the automotive and industrial battery market by becoming a technological leader. Twenty countries are represented on the 2014 list of local dynamos, and only 27 companies, or slightly more than half, are based in Brazil, Russia, India, or China. Africa has six companies on the dynamos list, while Southeast Asia has seven. (For brief profiles of the three lasting dynamos we have identified as having staying power, see the sidebar Still Thriving. ) The 2014 local dynamos have been growing faster than comparable companies in emerging and mature economies. From 2009 to 2013, their revenues grew by 28 percent annually. (See Exhibit 6.) During the same period, total shareholder return rose 26 percent annually for the 2014 local dynamos, a rate that is much steeper than those for indices composed of similar companies. (See Exhibit 7.) These companies have not followed the same path to success. By understanding what has driven their performance, both local and global companies can compete more effectively in these markets. 10 How Companies in Emerging Markets Are Winning at Home

13 Exhibit 6 The BCG 50 Local Dynamos Grow Faster Than Their Peers % Annual revenue growth, BCG local dynamos MSCI Emerging Markets Index companies S&P 500 companies MSCI World Index companies Sources: Bloomberg; BCG analysis. Still Thriving This year, we have identified three of the 2008 local dynamos as lasting dynamos. They provide snapshots of the staying power of many local companies in emerging markets. Tencent. With annual revenues exceeding $9.9 billion in 2013 and an annual growth rate of more than 50 percent since 2009, China s largest Internet service provider shows no signs of slowing down. Tencent s QQ instant-messaging service has more than 800 million users, while its newer WeChat mobile text- and voicemessaging service has more than 500 million users. Once viewed as an imitator, Tencent is placing big bets on innovation. More than half of its staff is involved in research and development, and the company is actively building a patent portfolio. MegaFon. Russia s second-largest mobile operator has nearly 70 million users and annual revenues of $8.4 billion. Like Tencent, MegaFon is focusing on innovation. It created MegaLabs in 2011 to explore new information, entertainment, and practical innovations. For example, its GetUpps! Android applications store, created in partnership with Yandex, helps developers launch and commercialize their products. MegaLab, which employs more than 300 professionals, also looks outside of MegaFon for sources of innovation. Astra International. With revenues of about $16.6 billion in 2013, this conglomerate is the largest company listed on the Indonesian stock exchange and has interests in the automotive, financial-services, heavyequipment, agribusiness, information technology, and infrastructure sectors. Astra still commands more than a 50 percent share in both the auto and motorcycle market in Indonesia. Through diversification, the company has reduced the auto sector s contribution to revenues from about 80 percent to about 50 percent. Astra s revenues have grown by about 18 percent per year since Astra has won several awards for its business practices. In 2013, it was named Indonesia s best-managed company by FinanceAsia. In 2012, Astra appeared on Fortune Indonesia s list of most admired companies. The Boston Consulting Group 11

14 Exhibit 7 The BCG 50 Local Dynamos Create More Value Than Their Peers Index of total shareholder return, (base=100) /1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 BCG local dynamos S&P 500 MSCI World Index MSCI Emerging Markets Index Sources: Thomson Reuters Datastream; BCG analysis. Note: The index of total shareholder return for BCG local dynamos is based on publicly traded companies. 12 How Companies in Emerging Markets Are Winning at Home

15 The secrets of Their Success Each local dynamo has its own particular story about how it has won in its home market. A unique combination of ambition, insight, capability, location, and hard work explains the success of HaiDiLao Hotpot s home-delivery service in China, for example, as well as Quala s quick success against Red Bull in the energy-drink category in Colombia. At the same time, the 50 local dynamos share six traits that give them an edge in these markets. Four of these traits are specific to the business models that the companies deploy to thrive in emerging markets: catering to customers and local conditions, leveraging digital technologies, operating at warp speed, and adapting to uncertainty and circumstance. The other two traits building talent engines and establishing functional excellence demonstrate the rapid development of these companies as they create world-class strengths and gain skills commonly found in multinational companies. Most of the local dynamos exhibit several, if not all, of the traits. (See Exhibit 8.) And while these companies may have a long way to go in mastering them, their efforts are already starting to pay off in developing a more complete set of capabilities. Let s see how they do it. Catering to Customers and Local Conditions The local dynamos understand their customers intimately and know how to appeal to them. They identify new customer segments, unmet needs, and local habits that other companies do not recognize. Perhaps foremost, they understand the cost-and-quality calculus that will appeal to the growing middle and affluent classes in these markets. They work through the constraints of emerging markets to offer superior customer service. Jia Duo Bao. Ten years ago, few people in China outside of the Guangdong province consumed herbal tea. Not any longer. Jia Duo Bao has built a $3 billion herbal-tea business in China through a deep understanding of Chinese consumers and relentless promotion of the beverage. After several false starts, Jia Duo Bao borrowed concepts from traditional Chinese medicine and marketed herbal tea, sold in a can, to cool heat in the body. Drink herbal tea, prevent heat became one of Jia Duo Bao s marketing slogans. Jia Duo Bao also actively marketed herbal tea to restaurants serving hot pot, Sichuan cuisine, and grilled food as an antidote to overeating. Until then, restaurants had proven to be a tough market to crack for canned beverages. The Boston Consulting Group 13

16 Exhibit 8 Local Dynamos Win in Six Ways Key Success Factors Characteristics Emerging-Market Capabilities Catering to customers and local conditions Serving new segments, local needs, or cultural habits Delivering superior customer convenience Offering low-priced products for a rising segment of mass-market consumers Leveraging digital technologies Leapfrogging to mobile and digital business models Leveraging rising online usage trends Operating at warp speed Becoming a first mover in fast-growing markets Consolidating fragmented and regionalized markets Growing organically or through acquisitions Adapting to uncertainty and circumstance Responding to infrastructure, climate, and other challenges Responding to challenges in critical parts of the value chain Pioneering unique business models World-Class Capabilities Building talent engines Attracting top talent despite structural talent shortages Building an engaging and rewarding work environment Establishing structured human-capital-management processes Establishing functional excellence Possessing strong R&D and operational excellence Developing go-to-market strengths Implementing strong product development Source: BCG analysis. Jia Duo Bao adopted a hub-and-spoke approach to introducing herbal tea throughout the country. Since Chinese consumers tend to follow city trends, the company would originally focus on large metropolitan areas when it entered a new province. Jia Duo Bao is now China s best-selling canned beverage, exceeding sales of Coca-Cola. Next up for Jia Duo Bao: the Southeast Asia market. Flipkart. This e-commerce company, founded in 2007, is largely responsible for making online shopping popular in India. The company started with just $8,000 in capital but is now valued at about $1.5 billion; it sold nearly $200 million in goods in fiscal The founders Sachin Bansal and Binny Bansal, who once worked for Amazon.com recognized that they would have to address the reluctance of Indian consumers to divulge credit card information and to accept delivery at home. Their solution was to require cash on delivery: the courier and customer exchange goods and payment at the doorstep. About 60 percent of Flipkart s sales are transacted this way. The company has raised about $540 million in private equity to invest in technology, logistics, and the supply chain. Flipkart s monthly sales, as expressed by gross merchandise value, imply an annual run rate of $1.5 billion. Yonghui Superstores. Yonghui has carved out a niche for itself in the competitive grocery market in China by emphasizing fresh foods. Sales of fresh foods, which account for only about 10 percent of the revenues at other 14 How Companies in Emerging Markets Are Winning at Home

17 supermarkets, exceed 40 perecent at Yonghui stores. This emphasis on fresh foods is hitting a sweet spot with consumers. The company has grown by more than 40 percent during the past four years, with revenues reaching nearly $5 billion in Yonghui has been opening 40 to 50 stores per year and now operates nearly 300 stores. Rather than rely on distributors and middlemen, Yonghui purchases 60 percent of its fresh foods directly from 150 farms, most of them in the Fujian province. Sourcing fresh foods directly has helped to lower costs and improve quality. It has also helped the chain compete against traditional wet markets. In some cases, customers can buy produce picked that very day. LC Waikiki. This Turkish fashion retailer, with more than 400 domestic stores and about $2.5 billion in sales in 2013, has survived the entry of such global competitors as Zara, Mango, and H&M by positioning itself as a family brand attuned to Turkish tastes and cost-conscious consumers. Its product lines are designed for everyone from infants to adults, and its stores cater to families, whose members tend to shop together in Turkey. Stores have well-placed seats for the elderly, and children are allowed to drink beverages and play inside. The chain relies heavily on local celebrities in its advertisements. lc Waikiki also has a strong online presence, boasting more than 650,000 registered users. Nearly 2 percent of sales currently take place online, and the company wants online sales to reach 10 percent by Shriram Transport Finance. This company was founded in India in 1979 to provide financing to owners of small trucks, a segment that financial institutions were largely ignoring. Shriram originally started financing new vehicles but soon realized that the owners could not afford the payments, so the company entered the used-truck financing market. Shriram has grown to have more than 600 branches and about a 25 percent share of the preowned commercial-vehicle financing market in India. Unorganized private financiers dominate most of the rest of the market. Shriram fully understands the credit risks and businesses of its borrowers as well as the value of their vehicles. Field officers are required to make monthly visits to borrowers, during which they often collect cash payments. SM. The largest retailer in the Philippines, SM operates more than 230 stores, supermarkets, hypermarkets, and department stores and had $4.3 billion in sales in The company has catered to the desire of Filipino consumers for local shopping options through its Savemore stores, which are located in barangays, small neighborhoods without modern retail outlets. At Savemore, customers can shop in a convenient indoor-grocery-store format to buy the types of low-priced, fresh groceries that are typically found in traditional markets. The local dynamos identify new customer segments, unmet needs, and local habits that others do not recognize. Savemore is SM s fastest-growing store format, and it gives the retail giant access to smaller provincial cities and rapidly growing towns that do not have an SM shopping-mall complex. The number of Savemore supermarkets has expanded from 20 in 2010 to 88 in 2013, with 30 to 35 new stores planned for In 2012, Savemore s revenues grew by 31 percent, with same-store sales growth reaching almost 10 percent; turnover per square meter and net margins both improved. Banco de Crédito e Inversiones (BCI). The fourth-largest bank in Chile, with $40 billion in assets, BCI was recently voted the second most innovative company in the nation by Universidad de los Andes largely on the strength of its digital and back-office offerings and its focus on customer satisfaction. Customers, for example, are able to deposit a check by snapping a photo of it with their smartphones. New software and systems allow small and The Boston Consulting Group 15

18 midsize businesses to navigate automated approvals for credit lines and other products outside of regular business hours. In 2012, BCI launched a transformation to improve the customer experience by, among other things, welcoming customers when they enter the bank, shortening wait times, simplifying pricing, and offering financial tools and videos. During the past five years, BCI has been the fastest-growing bank in Chile. In 2012, it also had the second highest return on equity. Leveraging Digital Technologies By 2018, there will be an additional 1 billion Internet users and more than 5 billion postpc products tablets and smartphones in circulation. (See the 2013 TMT Value Creators report, The Great Software Transformation: How to Win as Technology Changes the World, BCG report, December 2013.) Most of these new users and devices will be located in emerging markets. Smart companies are using mobile technologies and the Internet to reach the new online users, to connect with their traditional customers, and to build business models that avoid the constraints of emerging markets. Although Internet and mobile coverage remain spotty in emerging markets, innovation is sky high. Without investments in hard infrastructure (such as stores and branches) to protect, many companies are focusing their resources on online and mobile channels. Xiaomi. This mobile-phone company, founded in 2010, has skyrocketed to success by capturing the enthusiasm for the Internet among young people in China. In 2013, the company sold about 18.7 million smartphones in the nation at about half the price of comparable Samsung and Apple phones; Xiaomi already outsells Apple in China. It also generated more than $5 billion in revenues. CEO and founder Lei Jun has ambitions to sell 60 million smartphones in Xiaomi holds the line on costs by selling phones only through the company s website. It offers batches of 200,000 to 300,000 phones at a time, and they sometimes sell out in minutes. Xiaomi is also mastering online marketing platforms. Its social-media team is active on WeChat, Baidu, QQ, and other online forums. Lei Jun has 8 million followers on Sina Weibo, currently the most popular social-media platform in China. Smart companies tap mobile technologies in business models that avoid the constraints of emerging markets. The company also uses social media to receive customer feedback and improve its products. For instance, Xiaomi releases an updated version of its Android-based operating software, MIUI, every week in response to customer feedback. Micromax. Just six years after entering India s mobile-phone market, Micromax is the number-two company, behind Samsung, selling about 2.5 million phones per month. Before entering the mobile-phone market, Micromax distributed computer hardware and telecommunications equipment. In 2008, the company s leaders recognized an opportunity for selling affordable handsets. Micromax s first phone, which sold for $30, had 30 days of standby battery life. This long battery life appealed to rural residents, who can lack reliable power supplies. The company has kept its prices low by sourcing standard components in large volumes from Chinese manufacturers. Micromax generated $563 million in revenues in 2013; it aims to become a $1 billion company in By focusing on affordable innovation, Micromax changed the Indian handset market from a seller s market to a buyer s. Micromax now sells more than 60 types of phones, ranging from dual-sim models to touch-screen smartphones, and it has moved into tablets and hybrid phablets. Tinkoff Credit Systems Bank (TCS). Most Russians emerged from the Communist era debt free. As oil prices surged and incomes 16 How Companies in Emerging Markets Are Winning at Home

19 rose rapidly for the middle and affluent classes, Oleg Tinkov, a Russian entrepreneur who had just sold his microbrewery, sensed that the country was ripe for an expansion in consumer debt. In 2006, he founded TCS, a credit card company that markets to customers through direct mail and the Internet and serves them through call centers and online. tcs has neither branches nor ATMs, a model that works especially well in the remote regions of Russia, where consumers are unaccustomed to the high levels of customer service that the company provides; credit cards, for example, arrive via courier within 24 hours. The lack of branches certainly has not held the company back: TCS has become the number-three credit-card issuer in Russia, with an 8 percent share and 3.5 million cards in use. In October 2013, the company raised $1.1 billion in a stock offering, and by the end of the year, it held $2.5 billion in outstanding loans. Operating at Warp Speed Local dynamos have proven to be adept at building their businesses swiftly and successfully. They add people in large numbers without faltering. They move into new segments and rapidly become market leaders. In markets comprising multiple regions and customer segments, many of the dynamos have created national brands and established a national sales and retail presence. These advantages can be especially important in emerging markets, where customers are often forming their first and often lasting impression of companies. Many local dynamos have also relied on acquisitions or capital spending to make inroads in their home markets. In all cases, they have shown that they know how to expand without sacrificing their entrepreneurial roots. Home Inns & Hotels Management. This chain of budget hotels is taking advantage of China s fragmented and underpenetrated economy-lodging market by both franchising and acquiring other chains. Franchising has helped Home Inns to lower capital spending and increase returns. The proportion of franchised hotels has risen from 30 percent in 2008 to nearly 60 percent in Acquisitions have enabled Home Inns to expand its footprint. In 2011, the organization bought Motel 168, the third-largest budget chain in China, for $470 million. Home Inns has made smaller acquisitions as well. From 2008 to 2013, Home Inns increased the number of its hotels from fewer than 500 to more than 2,000, and it boosted the number of cities served from fewer than 100 to nearly 300. With revenues of $1 billion in 2013, Home Inns has a share of nearly 25 percent of the branded economy-hotel segment. Magazine Luiza. This retailer has grown more than 26 percent annually since 2009, with sales reaching about $4.1 billion in 2013, and it has done so by catering to Brazil s swelling middle class. As a result of several acquisitions, Magazine Luiza has more than tripled the number of its stores over the past ten years. But the company has also grown organically, expanding in important cities such as São Paulo, where it opened 44 stores in a single day in Many dynamos have created national brands and established a national presence. More than 85 percent of Magazine Luiza s sales occur in traditional stores, where household appliances, electronic goods, computer and other digital equipment, furniture, and toys are big sellers. After raising money in a public offering in 2011, Magazine Luiza began a big e-commerce push. Online sales have been growing faster than conventional sales, thanks to innovations such as social-shopping services and strong fulfillment. The company has, for example, created online stores on Facebook and elsewhere that allow consumers to sell goods on commission to friends and family. Magazine Luiza is the only real multichannel retailer in Brazil, selling all goods and services under the same brand name and using the same logistics and back-end software. The Boston Consulting Group 17

20 BIM. With more than 4,000 stores up from 21 in 1995 and 95 percent geographic coverage, BIM is the largest grocer in Turkey, despite the presence of global competitors. A discounter with bare-bones store interiors and a product portfolio limited to 600 items, BIM has revolutionized the retail market in Turkey, which historically has had a low share of modern retail shopping. Only about half of retail sales in the country occur in modern retail outlets. Consumers have been accustomed to shopping in neighborhood grocery stores called bakkal. Many dynamos work through limitations to create advantages other companies will have difficulty duplicating. Over the past decade or so, however, BIM has won over the newly emerging middle class with good quality, low prices, and convenience. Nearly 3 million shoppers a day visit BIM stores, and the company generated total net sales of $5.5 billion in 2013, up 20 percent from Almarai. Saudi Arabia s Almarai is the largest integrated dairy company in the world, with revenues of $3 billion in Running a dairy in the middle of the Arabian desert is a challenge. Almarai s farms have shelters to protect its 60,000 cows from the sun and heat, and 4,000 vans make daily deliveries to 90,000 retail outlets. Almarai has used this distribution network to expand into related products, such as juices, cheeses, butter, and poultry. Since 2007, the company has spent $3 billion to develop new product lines, such as infant formula and baked goods. Adapting to Uncertainty and Circumstance In the prior sections, we highlighted local companies that have thrived by focusing on a specific talent, such as developing advanced supply chains and distribution networks, modern retail formats, and interactive digital channels. In this section, we highlight companies that have found similar success in their home markets by finding ways to navigate logistical and operational roadblocks and regulatory complexity. Despite significant progress, emerging markets remain challenging. The supply of electrical service is sometimes uneven. Roads and rail networks, high-speed wireless networks, and ports are works in progress in many locations. Market intelligence is occasionally spotty. Talent, a premium in all markets, is doubly valuable in these markets. Many local dynamos have creatively worked through these limitations often by deploying the key success factors articulated earlier to create advantages that other companies will have difficulty duplicating. Dalian Wanda Group. For many commercial real-estate developers in emerging markets, finding tenants to fill a newly constructed mall can be a challenge. As the leading commercial real-estate developer in China, Wanda has solved this problem by creating a customized business model. While most developers land anchor tenants before completing a mall, Wanda creates strong partnerships with many retailers, which then have an active say in the location, size, and specific details of the mall, such as ceiling and entrance heights. Wanda maintains long-term partnerships with several large global retailers (including Wal- Mart, Carrefour, and B&Q) and local retailers (such as Parkson department stores and Suning, an electronic-appliance chain). These partners pay their first year s rent in advance, ensuring that the project will be financed and will start off profitably. Wanda is also ruthless about hitting deadlines. The company built Guangzhou Baiyun Wanda Plaza a retail, office, and residential development with a gross floor area of 392,000 square meters in only 11 months; that s one-third the time a project of that size would usually take. The fast turnaround helps to give prospective tenants confidence that they will open on schedule and that mar- 18 How Companies in Emerging Markets Are Winning at Home

21 ket conditions will not have radically shifted in the interim. Wanda generated revenues of $31 billion in It operates 85 malls and 54 hotels across China. Equity Bank. One of the largest banks in Kenya, with assets of $2.9 billion in 2013 and 8.7 million customers, Equity has expanded by providing services to customers previously viewed as unbankable. Rather than build local branches for people who live in remote areas, Equity Bank relies on agents to deliver financial services. These agents are under contract to Equity Bank and are trained to offer basic banking services to customers. The agents use their smartphones to accept an application for a new account: they load data onto the phone and snap a photo of the applicant and his or her supporting documents. The application is then processed centrally, and the applicant receives notification of the status of the application via text messages. Once the account has been approved, the customer can subscribe to the bank s Eazzy 247 mobilebanking service. Ozon.ru. One of Russia s largest and most trusted e-commerce companies, Ozon.ru had a gross-merchandise value of $750 million and 17 million users in The company tackled two main barriers to online shopping slow, unreliable postal deliveries and low credit-card usage and turned those constraints into advantages. Ozon.ru developed its own distribution company, O-Courier, which now operates in 550 cities across the country, with more than 2,300 pick-up points. Only about 8 percent of Ozon.ru s orders are delivered by the postal service. Most customers still pay in cash, but the company is investing in electronicpayment technology. Internet penetration in Russia is still relatively low: approximately 66 million people, out of a population of 140 million, are online. So the future for Ozon.ru, which is the leading online travel agent and has a 63 percent share of the online book market, looks bright. Building Talent Engines When senior executives are asked to name their three biggest challenges, talent almost always makes the short list, and often it is at the top. In last year s survey of 156 business leaders, BCG asked the executives to identify their most critical business challenges and their ability to address them. Respondents said that their companies demonstrated the largest performance gap in attracting and retaining talent and developing local leaders. Talent shortages are acute everywhere, but they are especially severe in emerging markets. Historically, companies have not offered the same level of training and development that schools provide, and schools just can t keep up with the demand for qualified candidates. Job-hopping is often viewed as the fastest way to advance rapidly in these markets. Talent, a premium in all markets, is doubly valuable in emerging markets. Local dynamos successfully overcome these constraints. They hire top local talent and build an engaging and rewarding environment so that the hires will stay. They also put in place strong human-capital-management practices so they can identify, train, and promote their best people and help employees who need stronger skills. HaiDiLao Hotpot. A signature Chinese dish, hot pot is a metal pot of simmering soup stock to which servers add a medley of sauces, sliced meat, leafy vegetables, mushrooms, wontons, egg dumplings, and seafood. HaiDi- Lao, founded in 1994, has grown to become a chain of 91 restaurants, pulling in $510 million in sales in The restaurants excel at providing a captivating customer experience. In the dining room, patrons wearing full-size aprons provided by the restaurant lean together over the boiling caldrons embedded in each table, dropping morsels of uncooked meat, fish, vegetables or tofu in a spicy steaming broth, then dipping them in flavor- The Boston Consulting Group 19

22 ful sauces. On special holidays, magicians in colorful, traditional masks perform tricks. Patrons order using ipads. Periodically, a server breaks into the restaurant s signature Olympic-style noodle dance, a Wall Street Journal article observed in The company has promoted this environment through careful development and training of its employees. Performance evaluations, for example, are based on customer satisfaction and an employee s passion for work. And HaiDiLao s benefits are unmatched in the restaurant industry: the company offers free apartments, with air conditioning and Internet, to employees, and it helps them solve any difficulties with enrolling their children in school. HaiDiLao offers its employees free apartments complete with air conditioning and Internet. Jiangsu Hengrui Medicine. This leader in China s pharmaceutical industry has a clearly articulated strategy that is built on developing strong research scientists. The company is investing heavily in therapeutic areas with unmet medical needs and strong government support, such as oncology and diabetes. To develop a pipeline of drugs in these areas, Jiangsu Hengrui employs more than 1,300 highly specialized scientists. Four of the scientists are part of the government s Thousand Talents plan, which is meant to attract foreign scientists to work in China. In addition to tapping into this highly selective program, Jiangsu Hengrui recruits from local overseas universities, looking especially for scientists with experience working for multinationals. Jiangsu Hengrui has been growing at an annual rate of 24 percent for the past four years, and the company reached nearly $900 million in sales in It devotes 10 percent of revenues to R&D, which exceeds the industry average in China, and has four R&D centers, which are located in Chengdu, Lianyungang, Shanghai, and the U.S. Masan Group. One of Vietnam s largest private companies, with a total market capitalization of more than $3 billion, Masan has an executive suite composed of individuals with broad management and international experience. Veterans of Citibank, J.P. Morgan, Morgan Stanley, Procter & Gamble, and Unilever have joined the company, which has expectations of exceeding $1 billion in revenues in The wealth of experience and skills that these executives brought accelerated the transformation of the company. Known originally for fish, soy sauce, noodles, and instant coffee, Mason Group now deals in metals and minerals and financial services. Kohlberg Kravis Roberts & Co., a leading U.S. privateequity firm, has invested more than $300 million in Masan Consumer. Among Masan s top outside hires are Madhur Maini, a former investment banker who led Masan Group as the CEO before becoming chairman of Masan Consumer; Seokhee Won, the CEO of Masan Consumer, who joined from Unilever; and Dominic Heaton an Australian with extensive mining experience in Papua New Guinea, Indonesia, and Laos who is the CEO of Masan Resources. Abdul Latif Jameel (ALJ). This company has been a distributor of Toyota cars in Saudi Arabia since Over the years, it has brought to its home market many of Toyota s globally recognized strengths and best practices, including a genuine commitment to talent development and community involvement. In 2003, the company established Abdul Latif Jameel Community Initiatives to promote job creation, arts and culture, education, health and social welfare, and poverty reduction. ALJ s professional and vocational rehabilitation initiative, for example, offers interest-free loans to Saudi candidates in many professions. Today, the community initiatives are woven into the fabric of Saudi Arabian society and are a source of great pride for ALJ employees. 20 How Companies in Emerging Markets Are Winning at Home